Get Ready For America's Double-Dip Recession

WASHINGTON - The U.S.
economy appears destined for several years of weak growth and
high unemployment that leave it vulnerable to a recession relapse
after the massive dose of government stimulus wears off.

While tepid growth looks likely to resume late this year and
build modestly into 2010, the credit bust has left households and
businesses unable or unwilling to borrow and spend as freely as
they did before the crisis.

The U.S. government has stepped in as lender and spender of last
resort, but its deep pockets are not bottomless. Waning political
and investor appetite for taking on more debt could stand in the
way of any additional big spending plans.

"When you remove the government stimulus, what the private sector
can generate in terms of growth feels like a recession," said
Jeffrey Rosenberg, head of global credit strategy at Banc of
America Securities Merrill Lynch in New York.

Rosenberg thinks the U.S. economy may trudge along at a sluggish
growth rate somewhere in the range of 0.5 percent to 1.5 percent
while banks recover from the credit crisis, which could take
another three years.

"If that's what you're able to generate, that economy is not
generating the job growth required to bring the unemployment rate
down," Rosenberg said.

This is a much darker outlook than the one put forward by
President Barack Obama's administration in its latest budget
projections, which show economic growth bouncing back to 3.2
percent next year and hitting 4.6 percent by 2012.

It also calls into question the staying power of a recent stock
market rally. The Standard & Poor's 500 is up more than 30
percent from an early March low.

The gloomier scenario assumes that banks take years to recover
from losses that some economists think could reach $4 trillion;
consumers curb borrowing and spending as they repair the $11.2
trillion hole blown through their savings last year; and the
explosion in government debt drives up interest rates.

If the forecast proves accurate, it would leave the economy
susceptible to a shock, such as a big jump in oil prices, and
could force the United States to issue even more debt than
investors expect. That would likely increase borrowing costs,
both for the government and the private sector.

NEVER SAY NEVER

Typically, deep recessions are followed by powerful recoveries
because when demand finally returns, companies quickly ramp up
production. That helps explain why Wall Street has been feeling
optimistic about recovery prospects.

However, recessions caused by financial crises have a history of
being long, deep and difficult to fully escape.

Treasury Secretary Timothy Geithner said Thursday that the
current crisis was "caused in large part by too much borrowing
and too much lending. And the adjustment process of that will be
difficult."

How difficult that adjustment will be depends to a large degree
on how dramatically consumers alter their behavior.

The saying, "Never bet against the U.S. consumer" has been a
profitable one for many years. But if this crisis has permanently
altered consumer attitudes toward debt, it would put a
considerable drag on growth because consumer spending accounts
for more than two-thirds of U.S. economic activity.

The other anchor is interest rates. Christian Broda, an economist
with Barclays Capital, said higher borrowing costs "are an
inescapable feature of the post-recovery world" as public
deficits and spending grow.

Already, huge government debt issuance is raising questions about
long-term U.S. fiscal stability. Concerns grew last week that the
country could be stripped of its top-tier AAA credit rating after
Standard & Poor's said it was considering downgrading
Britain's sovereign rating.

This week marks a big test of investor appetite for U.S. debt.
The government plans to issue a massive $101 billion in notes and
bonds, matching the weekly record set in April.

Broda thinks the yield on 10-year U.S. government paper may reach
6 percent by 2011, compared with 3.4 percent now. Because so many
other loans are based on that rate, that could make it costlier
to buy a house or expand a business.

NO WAY OUT

It all adds up to a sluggish economy with less cushion to cope
with a shock. What form that shock might take remains to be seen,
but a jump in oil prices is one likely suspect. Oil has nearly
doubled since the start of the year, topping $60 per barrel
Tuesday, and futures prices suggest it will edge higher at least
through the peak summer driving season.

"You start firing up demand and guess which price goes up first?
Oil," said James Galbraith, an economist who teaches at the
University of Texas' LBJ School of Public Affairs.

"If I were in a position to be talking strategy to the (Obama)
administration, I would be saying you've got to take the energy
business seriously. You're going to end up in a stagflation
trap."

If the economy climbs out of one recession and into another, it
wouldn't be the first time. It happened most recently in the
early 1980s, when the United States endured two recessions in
less than three years.

Regardless of what triggers a relapse, the Obama administration
won't stand idly by, Banc of America's Rosenberg said. There will
be pressure for even more stimulus spending, particularly if the
economy is faltering when midterm congressional elections
approach in 2010.

"The problem is whether or not (stimulus) can work without itself
creating other problems," Rosenberg said. "The most likely 'other
problem' is a rise in interest rates.